Real Estate vs. Stocks
In video episode 365:
- Tony invested his $50,000 inheritance in real estate by putting it down on a $250,000 house and renting it out, initially earning $24,000 a year in rent but facing mortgage and maintenance costs associated with real estate.
- Jimmy invested his $50,000 inheritance in the S&P 500, reinvesting dividends, and saw his investment grow to $184,000 over ten years with increasing annual dividends and no active management required.
- Despite some years of loss, the S&P 500 investment provided a more passive income compared to the active management and unexpected costs associated with Tony’s real estate investment.
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Real Estate vs Stocks Transcript
In episode 365, we talk about Jimmy and Tony and what happened with their money.
I’m going to share a story with you.
At the end of 2012, two brothers inherited $100,000 dollars, and they split the money fifty-fifty.
– So Tony ends up with fifty thousand dollars.
– Jimmy gets fifty thousand dollars.
Tony says, “I know real estate. I know what I’m going to do. I’m going to take that fifty thousand dollars and put it down on a house here in Monmouth County, and I’m going to buy a house for two hundred fifty thousand dollars. I’m going to take out a mortgage and put some renters in the house.”
Let’s go through what happened with Tony.
Jimmy didn’t really know real estate, so he said, “I’m just going to stick it in the S&P 500.”
But Tony says, “You know what I can get in 2013? I can get two thousand dollars a month.”
So he can brag to people that, “Hey, I took my $50,000 dollars and now I’m getting $24,000 dollars a year in rent.”
And he looks like a genius when you use numbers like that.
But the problem is he’s also got a mortgage on this property for $200,000 dollars. And if you do the math, interest rates ten years ago in 2013 were about 4%.
So he was looking at principal, interest, taxes, and insurance of $1700 dollars a month.
So his real net cash flow was probably about $300 dollars a month, about $3600 dollars in the year – in the first year.
But that’s okay – because he can raise the rent every year. No big deal.
Fast forward, he’s raising the rent each year. But he’s also, along the way, had to put on a new roof. That’s $10,000 dollars. He had to replace the condenser on the air conditioner. A new AC unit, that’s $6,000 dollars. He had a flood in the basement that was another $7500 in repairs.
When a tenant moved out, he had a few months where he didn’t get any rent. He had to use that time to paint and put in new carpeting; these are out-of-pocket expenses.
So his income has increased. But along the way his property taxes have gone up.
All of his other costs have gone up. He’s had repairs, he’s had maintenance, he’s had to chase down rent checks.
During COVID, he had someone who lost their job and said, “Hey, I’m not going to pay your rent.”
So he lost an entire year of cash flow when it came to that.
Let’s just fast forward ten years from 2013 to 2023. Values in Monmouth County are way up. If you live in this neck of the woods, you know what I’m talking about.
Cash flow has actually been pretty good. Has he had some problems? Sure.
He’s had squatters.
He’s had times where he didn’t get rent, in between tenants.
He’s had some problem tenants.
And so far, in ten years, he’s made 120 mortgage payments. So in 240 MORE payments, the place will be all his.
Let’s take a look at Jimmy’s side of the ledger.
Jimmy put $50,000 into the S&P 500 – because he doesn’t really know real estate. And he can’t be bothered.
He reinvested the dividends. So the first year he got $1200 in dividends, and they just got plowed back into buying more shares.
By the way, in the last ten years, the S&P 500 has lost money in 3 of the 10 years.
But along the way, the cash flow has continued; the dividends go up – almost every year.
He’s now getting $2300 dollars a year in dividends in 2022. So his income has doubled.
And his $50,000 dollars – back in 2013 – is now worth, with dividends reinvested, $184,000 dollars today.
Jimmy has done absolutely nothing. He sat on his butt.
He played golf. He’s learned to play pickleball.
He can access this money whenever he wants. Because it’s probably one of the most liquid investments out there, even though this isn’t a recommendation to buy or sell the S&P 500. It’s a very liquid investment.
Oh, and by the way, he doesn’t get any phone calls at two o’clock in the morning saying, “Hey, the hot water heater broke. You need to come fix it.”
A lot of people want to talk about passive income.
I think investing for the long term can be about as passive as you can get.
It’s worth taking a look at.
That’s the message for episode three hundred sixty-five.
